Many CFOs, controllers, and finance VPs recognize revenue today based on incomplete, inaccurate, or low-quality data, which often results in incorrect financial reporting, imperfect sales execution and incorrect commission payments, among other challenges. Failure to recognize revenue in the appropriate time frames and amounts can also put your company at significant risk of regulatory penalties.
Generally, revenue is either recognized when products are delivered to distributors (sell-in) or when distributors resell products to end-users (sell-through).
It is becoming more common for channel-centric companies to recognize revenue on a sell-through basis, because revenue is not considered earned as long as the distributor retains the right to return the goods, or the sale price is not “fixed and determinable.”
The rules of sell-through revenue recognition come into play when there are rights of return (SFAS 48), stock rotation rights or when back-end rebates or co-op / MDF payments reduce revenue (EITF 01-09). When products and services are bundled together under a single SKU or invoice, multiple-element revenue recognition (EITF 00-21) and Vendor Specific Objective Evidence (VSOE) rules can apply.
Other revenue-recognition rules and guidelines dictated by the AICPA, FASB, PCAOB and SEC, such as SOP 81-1, SOP 97-2, SOP 98-9, SAB 101, all demand increasing diligence from accounting staff to ensure compliance and to be audit-ready.